Riverstone Email:
On Tuesday I attended the Riverstone Networks road show presentation at the Ritz Carlton Hotel in San Francisco. The Morgan Stanley-led deal is attempting to price 10 million shares between $11-13. The company is being spun out of Cabletron Systems (CS), After the offering, Cabletron will still own 85% of Riverstone. which Cabletron plans to spin out to its shareholders later this year. The presentation in the elegant Ritz was well attended by potential investors looking to garner some insight into the first technology IPO of the year.
Riverstone Networks is a maker of routers and switches for the metropolitan segment of the network. Riverstone’s products are compatible with next generation networks as well as legacy systems.
Overall, the presentation was decent. After going over the specifics of the deal, Riverstone quickly summarized their business and then described how they differentiate themselves from competitors such as Extreme and Foundry. What makes Riverstone distinct from their competitors is the company’s sole focus on the metro market and on service providers. Riverstone can leverage its experience with one service provider and duplicate it with another. The company’s competitors sell into multiple parts of the network as well as to enterprises and carriers, thus losing their focus and expertise.
Another major selling point which Riverstone uses against its competitors is the ability for carriers to use the company’s products in both next-generation and legacy systems. As carriers reduce their cap-ex spending they will be looking to leverage their existing networks, both next-gen and legacy. Riverstone products allow integration with multiple technologies; its competitors’ products can only do one technology.
Additionally, Riverstone products contain advanced service features such as bandwidth management and provisioning, accounting and billing, quality of service and content delivery capabilities. By using these features to track use, carriers can offer multiple types of service plans to their clients.
In terms of financials, the company plans to be profitable by the end of the year. For calendar year 2001 the company will lose 11 cents on revenue of $211 million and in calendar year 2002, the company forecasts making a profit of 25 cents on $403 million in revenues. There is potential upside to the numbers based on a deal the company has with Tellabs (TLAB). While the company would not give specifics on the magnitude of the deal, Riverstone is guaranteed a minimum of 60% of the contract. The 60% is modeled into the forecasts; the rest of the contract is not. The analysts think the numbers are conservative, but in this environment nothing is certain.
The one potential caveat to this IPO is valuation. Riverstone will trade at 6x 2001 revenues. Many of its competitors are trading at 4x revenues. On a trailing EPS basis, Riverstone for 2001 will trade at 6.5x while Extreme trades at 6.8x and Foundry 6.1x. We would have liked to see the deal be priced at more of a discount to established names but Riverstone is growing faster than their competitors - around mid 20% sequential growth. Valuation will be something we will follow closely on this deal.
This IPO has attracted a ton of interest. Currently, the deal is five-times oversubscribed, so there appears to be a good deal of interest from investors. While I do not believe that it will sky rocket on the first day, I do think it will trade in positive territory. Additionally, if the company can execute with the Tellabs deal, there could be significant upside to the numbers. We are indicating interest for this deal. |
